More Straight Talk on Investing

10It's What You Keep That Counts

Investing is an inherently risky activity and full of uncertainty. In truth, we, as individual investors, have no control over the market forces and economic cycles that affect the performance of our investments. But we do have control over a few important things, and those will be the focus of this chapter and the next.

In investing, it is what you keep that counts. And what you keep has everything to do with three simple things: (1) what your investments earn; (2) the costs you pay your investment provider; and (3) the taxes that you pay on your earnings. Figure 10.1 demonstrates the considerable impact of costs and taxes on a hypothetical fund account. It underscores that the bottom line is your profit after costs and after taxes.

All investments have costs. Most gains get taxed sooner or later. You can't avoid costs and taxes altogether, but there are some steps you can take to minimize the bite, and you don't need an accounting or law degree to do so. If you keep a few simple things in mind when you structure your investment program, you'll be able to keep more of your returns. In this chapter, I'll explain:

• How to choose low-cost, tax-efficient funds.
• How to avoid behavior that hurts you on taxes and costs.
• How to be judicious about which kinds of funds you hold in your tax-advantaged accounts and which ones you hold in your taxable accounts.

Income
Gross investment gain (10% before expenses)	$1,000.00
-Fund expenses (0.63% ...